Gaming and leisure group Sun International’s year to end-June results re-affirm that the big bet for growth in a dour local economy lies in The Time Square casino, set to open in Menlyn, Pretoria in April 2017. It will cost R4.1bn and will be SA’s second-largest casino, behind Cape Town’s GrandWest.
It could be a game changer for Sun. But I reckon punters should keep tabs on three smaller side bets that Sun may put in play. The first is hinted at by its new segmental reporting format, where its so-called "smaller urban casinos" — Windmill, Meropa, Flamingo and Golden Valley — have been lumped together. Surprisingly, and in contrast to a mediocre performance from the larger casino properties, the collective small casino revenues grew 12% to R952m and operating profits by 8% to a not insubstantial R223m.
I have long argued that Sun — especially as its Latin American footprint extends — should relieve management of the hassle of smaller casinos, which are overshadowed by GrandWest, Sibaya and Carnival City. Then again, the collective value of the smaller properties — operating in centres where casino complexes might be the biggest attraction — is apparent. It’s probably not the right time for Sun to put these properties on the market, but when economic conditions improve there may be an opportunity to fetch an excellent price for a smaller casino conglomeration or to hive off individual properties.
The second side bet that already appears to be paying off is Sun’s tilt at limited payout machines (LPMs) — through its 50% stake in GPI Slots — and sports betting, via Sunbet. This alternative gaming hub, which I suspect is dominated by LPMs, managed an 18.5% hike in revenue to R967m and a 23% increase in operating profits to R137m. Sun will do well to pursue bolt-on deals, and prepare Sunbet for the inevitable onset of online gaming.
The hand Sun appears likely to play sooner rather than later (albeit as a prudent fold rather than a brave bluff) is in the newly categorised "operations under review" (OUR). Tucked away under OUR are the Carousel, the swanky Table Bay and Maslow hotels, the old Morula casino (its licence will be transferred to The Time Square), the Naledi in Thaba Nchu and the Fish River Sun. Tagging businesses as OUR suggests disposals are likely sooner rather than later.
The opening of Time Square will not only close the Morula casino, but also (in Sun’s words) "severely impact" the Carousel, north of Pretoria. Sun adds that "all options, including disposal, are being considered for the Carousel, which will need to be downscaled when Time Square opens."
I’m really not sure what Sun wants to do with its two upmarket hotels. The Table Bay Hotel lease expires in May 2022 and discussions are under way, including the possibility of early renewal. The Table Bay performed fairly robustly, with revenue growth of 23%. Occupancies were up 11% to 74% and the average room rate increased 13%. It managed operating profits of R51m from turnover of R310m, which might get the attention of leisure-inclined real estate contenders. The situation at the Maslow is a little different, though there was a 7.5% increase in occupancy to 68% and the room rate increased 5.2% to R1,182. However, the property posted a R48m loss, with Sun confessing that the financial obligations of the long-term lease were onerous.